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How Much Is Purchasing Power Parity Worth?, Stefan C. Norrbin, C. Mitchell Conover
How Much Is Purchasing Power Parity Worth?, Stefan C. Norrbin, C. Mitchell Conover
Finance Faculty Publications
Updating Bilson 's (1984) investment strategy using an out-of-sample forecast procedure, we find much smaller profits from a trading strategy based on purchasing power parity. Though the total profit is significant at a 5 percent level, it is substantially lower than what Bilson found. Our results suggest Bilson's excess profits are due to the sample of data used and the in-sample nature of the tests. Hence, this paper demonstrates that the simple investment strategy leads to the same conclusion that econometric testing does; namely, that purchasing power parity is only marginally useful in forecasting exchange rates.